Ready To Rumble

Kirk Hansen Alliance of American Insurers Downers Grove, Ill.

DUKING IT OUT in court is not the only way to fight a legal dispute. Arbitration can help to settle disputes out of court and potentially save businesses money on legal fees, such as discovery, deposition and attorneys. But recently, several states have changed the way punitive damages are awarded when using this alternative dispute resolution method.

Typically, haulers insert arbitration clauses into their commercial account contracts, which state that each party agrees to arbitrate rather than litigate. In addition to reducing legal costs, this can help to reduce the number of cases burdening court systems. In the past, arbitration clauses did not allow punitive damages to be awarded, but this is no longer the case.

Earlier this year, the Oregon Senate introduced Bill 297, which voids arbitration clauses in a written contract if they are on a standardized printed form rather than have negotiated language, for the purchase of a goods or service, and if the arbitration provision is not specific and conspicuous.

In the meantime, the Chicago-based National Conference of Commissioners on Uniform State Laws (NCCUSL) recently drafted a model bill called the Uniform Arbitration Act. While the Act was not grossly controversial, it does include a section allowing arbitrators to award punitive damages and attorney's fees.

The rationale for this punitive provision is that an arbitrator should have discretionary powers similar to a judge. But allowing arbitrators to award punitive damages could potentially introduce hostility and expense to the arbitration process, when arbitration was designed to reduce costs.

Because arbitration is used as a less confrontational alternative to settling disputes, the Uniform Arbitration Act may undercut arbitration's core function. By definition, the purpose of punitive damages is to punish one of the parties involved in a proceeding. If punitive damages and attorney fees are available in arbitration, this alternative dispute resolution method may no longer be an attractive alternative to the trial courts.

Not everyone agrees with the changes to arbitration. For example, several insurance agencies and other groups are urging state legislatures and Congress to consider laws that would limit punitive damages awarded in arbitration. These same groups also want to end what some perceive as frivolous lawsuits filed by plaintiff's attorneys.

Nevertheless, 14 state legislatures have introduced the Uniform Arbitration Act this year. In New Jersey, the bill passed despite a conditional gubernatorial veto requesting language concerning certain labor issues be removed. In North Dakota, the bill passed the Senate and now is being considered by the House.

In 2002, the Act was considered in several state legislatures but enacted only in Utah. Certain versions of the Act were enacted in 2001 in Hawaii, New Mexico and Nevada. However, Nevada's bill was amended so that punitive damages are not expressly mentioned, although an arbitrator does have discretionary power to make awards similar to a judiciary member.

Movements toward the Uniform Arbitration Act are not a surprise, considering that the NCCUSL is comprised of approximately 300 lawyers, judges and law professors representing various states. The 112-year-old organization is similar to a unicameral legislature and, through its system of committees, drafts proposals for model laws if the group uniformly believes the laws are desirable.

In a recent case, an arbitration panel awarded punitive damages — to what many believe were an excessive amount. In Sawtelle v. Waddell & Reed Inc., Feb. 11, 2003, the arbitration panel awarded $25 million worth of punitive damages in a case involving a dispute with a brokerage firm. However, the New York Appellate Division held that the arbitration panel acted irrationally in awarding damages almost 25 times greater than compensatory damages. And the U.S. Supreme Court reached a 4-to-1 verdict, with the majority saying that this case bordered on the outer limits of constitutionality.

Allowing arbitrators to award excessive punitive damages and attorney fees could damage efforts to manage legal costs. However, some believe that an arbitrator should have discretionary powers similar to a judge. Plaintiff lawyers like the Act because it allows them to seek the huge awards normally associated with trials, without any of the costly expenses of depositions, etc. Regardless, the waste industry always should protect itself from legal battles.